The Reserve Bank of India (RBI) has issued a circular detailing new guidelines for Asset Reconstruction Companies (ARCs) regarding buying bad loans through deals.
- As per the new directions, ARCs will not be allowed to buy non performing assets through bilateral deals where the lender is a sponsor, financier or a group company,
- However, ARCs can participate in financial assets auctions conducted by the lenders provided the auction prices are determined by the market forces and the whole process is conducted in a fair and transparent manner.
- Through the new directions, the RBI is sending a message to lenders that they cannot engage in financial engineering to clean their books by using their liquidity fund to ARCs.
- ARCs will takeover the bad loans from the books of the banks and recover the money either by selling the assets or by getting the business to be back on track.
- The directions come at a time when banks are set to increase the pace of their loan sales and be with good numbers at the end of the year.
- Selling NPAs, apart form cleaning up books, will help lenders in saving management time.
- Due to the current rules of insolvency proceedings, it takes two years of management time for the resolution of a stressed asset.
- Banks can save this time by selling the assets and move on.
- An ARC tries to recover the bad loans or securities associated with the bad loans at a mutually agreed rate with the lender that is a bank or a financial institution.
- All ARCs must be registered under the RBI.
- Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002) outlays the regulating mechanism of ARCs.
- The ARCs can take over any financial assistance provided by the banks or financial institutions to recover them. The financial assistance may be loans, guarantees, advances, debentures, bonds, and others.